RJ revolution 'drawing to a close,'

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Apr 13, 2003
RJ revolution 'drawing to a close,' says analyst
Dateline: Thursday April 24, 2003

The ability of US Major airlines to achieve significantly lower labor costs spells bad news for the fast-growing Regional airline segment of the market as well as the future for 35/50-seat regional jets, says JP Morgan equity analyst Jamie Baker.

In an extensive report published yesterday, Baker said, "We believe the RJ revolution is drawing to a close." He noted that mainline labor unit costs rose 37% from 1994 versus just 8% at the Regionals. This, in his view, was the primary driver for the rapid growth of the Regional sector. In effect, Major airlines outsourced routes that no longer could be flown profitably given higher labor costs and declining revenue. Now, "with mainline labor expenses expected to fall by 20%-30% over the next two years and with Regional pay unlikely to match, the marginal appeal of continued Regional growth is quickly diminishing. As such, we expect to see significant cancellation or deferrals of RJs on order." He said the RJ backlog numbers some 500.
Furthermore, Regional airlines that operate under fee-per-departure arrangements already are under pressure to reduce the fees they charge to their financially beleaguered codeshare partners.

Although a relaxation of scope clauses could permit additional 70/90-seat RJs to enter the Regional airline fleet in codeshare, it also is possible that these aircraft will be flown by mainline pilots. "American is a case in point: Its concessionary pilot contract transfers 70-seaters currently in operation plus all future deliveries from Eagle to the mainline," Baker wrote.--PF


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